12 Questions
What happens to the stock value if the cash flow (D or g) increases?
The stock value increases
What does the term $D_1/V$ represent in the equation $r = D_1/V + g$?
The expected dividend yield of the stock
What type of companies is the constant-growth model best suited for?
Mature, dividend-paying companies with steady growth
What happens to the stock price if the required rate of return (r) decreases?
The stock price increases
What does the constant-growth model capture regarding the components of a stockholder's total return?
Both the dividend and capital gain components
What type of companies are likely to have fairly predictable growth rates in earnings and dividends?
Large-cap and mature mid-cap companies
Which model assumes that dividends will not grow over time?
The zero-growth model
What is the formula used to calculate the value of a share of stock in the constant-growth dividend valuation model?
Value of a share of stock = Next year's dividends / (Required rate of return - Dividend growth rate)
What is the condition for the dividend growth rate (g) in the constant-growth dividend valuation model?
g must be less than the required rate of return (r)
Does the constant-growth dividend valuation model assume that the investor will hold the stock forever?
No, the model does not make any assumptions about how long the investor will hold the stock
What does the constant-growth dividend valuation model assume about the growth rate of dividends?
The dividends will grow at a constant rate forever
If the investment horizon has no bearing on the computed value of a stock, what does this imply about the value calculated using the constant-growth dividend valuation model?
The calculated value will be the same regardless of the investment horizon
Learn about the Dividend Valuation Model, which considers a growing stream of dividends. This model assumes that dividends grow over time at a specified rate, providing a new perspective on stock valuation.
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